Infrastructure Firms Rally Over Amended Rules For Arbitration Claims
An amendment does away with the need for contractors to furnish bank guarantees for interest amount in arbitration claims.
Shares of infrastructure companies rose between 6 percent and 10 percent today after the Cabinet Committee on Economic Affairs approved an amendment that did away with the need for contractors to furnish bank guarantees for the interest amount involved in arbitration claims with the government.
Previously, contractors had to furnish bank guarantees for the principal and interest components of the claim amount, leading to liquidity strains and burdening their cashflows.
That comes as nearly 15 percent of the revenue of the top six construction companies by market value—or around Rs 6,000 crore—was held up due to arbitration in the year ended March, according to an analysis by BloombergQuint. Such claims, the analysis revealed, are stuck with central and state government agencies and the National Highways Authority of India.
The latest measure comes as amendments to a circular floated by NITI Aayog in 2016 to all central government departments which stated that in claims where the arbitral award has been challenged by the government entity, 75 percent of the award should be paid to the contractor against a bank guarantee, with no prejudice to the final court outcome.
The interest component accrued is a big chunk of the dispute and hence from that angle the measure is a big relief for contractors, said Rohit Natrajan, research analyst with Antique Stock Broking.
Contractors have been suffering with cash flow concerns and this move definitely does a lot to address the liquidity concerns faced by the construction sector, YD Murthy, executive vice president of NCC, told BloombergQuint. It removes the burden of providing bank guarantees over and above the arbitrational awarding amount, he said.
The CCEA, separately, approved amendments to the Toll-Operate-Transfer model for national highways under which public-funded freeways that are operational and have toll revenue generation history of one year shall be monetised through the model, from the previous two years. Around 75 such projects have been identified for potential monetisation using the TOT Model and bundled into 10 separate bids to attract economics of scale for the private sector.